Option A
Sole trader
A sole trader registers with HMRC, reports business profits through Self Assessment and is personally responsible for business debts.
Limited company vs sole trader: which is better?
Updated June 2026 10 min read
Quick verdict
Sole trader is simpler and cheaper to run. A limited company can become worthwhile at higher profits or where liability, retained profits, pension contributions or client requirements matter. The company route can save tax, but only if the savings outweigh accountancy, admin and compliance costs.
Option B
Limited company
A limited company is registered at Companies House, pays corporation tax on profits and can pay directors through salary, dividends or pension contributions.
Side-by-side comparison
A sole trader is personally the business, with simpler tax and admin but unlimited liability. A limited company is a separate legal entity, adding liability protection and more planning options, but also public filings, company accounts and more responsibility.
Setup
Sole trader
Simple HMRC registrationBetter
Limited company
Company formation and filings
Annual admin
Sole trader
Self AssessmentBetter
Limited company
Accounts, corporation tax and confirmation statement
Accountancy cost
Sole trader
Usually lowerBetter
Limited company
Usually higher
Personal liability
Sole trader
Unlimited
Limited company
Limited in many casesBetter
Tax planning
Sole trader
Simpler but less flexible
Limited company
More flexibleBetter
Public records
Sole trader
PrivateBetter
Limited company
Some details public at Companies House
Best for
Sole trader
Simple smaller businesses
Limited company
Higher-profit or higher-risk businesses
| Compare | Sole trader | Limited company |
|---|---|---|
| Setup | Simple HMRC registrationBetter | Company formation and filings |
| Annual admin | Self AssessmentBetter | Accounts, corporation tax and confirmation statement |
| Accountancy cost | Usually lowerBetter | Usually higher |
| Personal liability | Unlimited | Limited in many casesBetter |
| Tax planning | Simpler but less flexible | More flexibleBetter |
| Public records | PrivateBetter | Some details public at Companies House |
| Best for | Simple smaller businesses | Higher-profit or higher-risk businesses |
Pros and cons
Sole trader pros and cons
Pros
- ✓Simple to start
- ✓Lower running costs
- ✓Less admin
- ✓Private financial details
- ✓Flexible for testing a business idea
Cons
- -Unlimited personal liability
- -Less tax planning flexibility
- -Can look less formal to some clients
- -All profit is taxed as personal income
Limited company pros and cons
Pros
- ✓Limited liability protection
- ✓More tax and pension planning options
- ✓Can retain profits in the company
- ✓Can look more established to some clients
Cons
- -More admin and filings
- -Higher accountancy costs
- -Company information is public
- -Money belongs to the company until extracted properly
- -IR35 and company rules may matter for contractors
Cost examples
Small side business
For modest profits and simple work, sole trader often wins because the admin and accountant costs are lower.
- Likely fit
- Sole trader
Growing freelancer
At higher, consistent profits, a limited company may create enough planning benefit to justify the extra admin.
- Likely fit
- Check company
Higher-risk work
Where contracts, liability or business partners are involved, the legal separation of a company can matter as much as tax.
- Key factor
- Liability
When to choose Sole trader
- ›You are starting out
- ›Profit is modest
- ›You want the simplest admin
- ›Liability risk is low
- ›You do not need to retain profits in a company
When to choose Limited company
- ›Profits are consistently higher
- ›You want limited liability
- ›You plan company pension contributions
- ›You work with clients who prefer companies
- ›You want to retain or reinvest profits
FAQs
When does a limited company become worth it?
It depends on profit, accountancy fees, dividend and corporation tax, pension plans and liability risk. Many people review the company route once profits become consistently strong.
Do limited companies always pay less tax?
No. They can be more tax efficient in some situations, but extra accountancy costs and changing tax rules can reduce or remove the benefit.
Can I switch from sole trader to limited company?
Yes. Many businesses start as sole traders and incorporate later when the commercial or tax case becomes stronger.
What is limited liability?
It means the company is legally separate from you, so personal assets are usually better protected from company debts, though guarantees, misconduct or tax debts can change this.
Do I need an accountant for a limited company?
It is not legally required, but most small companies use one because accounts, payroll, dividends and corporation tax are more complex than sole trader records.
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